Unofficial Earnings Play
Unofficial Earnings Play
Hello Smart Option Sellers! I mentioned yesterday that I may have an unofficial earnings play for everyone today. The company releases earnings after the bell today and although the option prices are not as cheap as I'd like them to be, I'm still going to give you the play. Use this as you will in deciding whether or not to enter. Remember, it's unofficial. Lululemon (LULU) Lulu is a clothing manufacturer of mostly women's workout and athletic gear. You don't need to know much more than that. What you do need to know is that for whatever reason, LULU has managed more times than not to jump big either higher or lower after announcing earnings. I'm thinking this time won't be much different. The problem here is that the option market-makers think so as well, and have priced the options accordingly. Summary: we won't be able to find a real bargain. But, it doesn't mean we still can't try. With LULU having the capability to jump higher or lower by at least $5 to $10 per share after earnings, we're going to want to concentrate on that radius. If we want to take advantage of a potential large move and find cheap options at the same time, we need to set our sights on a few different strike prices. And since we don't know which way the stock will move, we'll once again be buying both call options and put options. The stock is currently trading near $64.50 per share. This means that you need to look at the $59.50 puts and lower ($59 puts, $58.50 puts, $58 puts, etc.) and the $69.50 calls and higher (70 calls, $70.50 calls, $71 calls, etc.) You will use the options that expire on this Friday March 31st (make sure you get this right). Currently, the $59.50 puts and the $69.50 calls are the closest to being in that $5 radius away from the current stock price and each are about $.70 per contract. Unfortunately, that's not even close to the cheapie $.05 options we're looking for. If you go further out and look to the $54 puts and $74.50 calls for example, those each cost about $.15 per contract. But, that just means the stock has to move so much farther before those options become profitable. The stock would have to jump over $10 - $11 per share after earnings, whereas if you bought the $59.50 puts and the $69.50 calls, the stock would have to jump about $6 - $7 after earnings in order to be profitable. It all comes down to how far you think the stock can move after earnings and how much you're willing to spend. Now, if the stock jumps $15-$20 after earnings, all of those options within a $10 radius would score big time. But that's asking a lot. My best advice if you want to get involved in this play is to choose call and put option strikes probably about $5-$7 away in radius from the price of the stock at the time of your entry. This would give you a cost of roughly $.35 - $.70 per contract on each side, making your total investment about $.70 - $1.40 per contract all-in. If you bought one contract of each call & put, you're spending $70 - $140 total. If you bought five contracts of each, you're spending $350 - $700 total. If you bought ten contracts of each, you're spending $700 - $1,400 total. You need to decide what your wallet can afford and how big of a jump you're thinking the stock can make. Clearly, this is not one of the cheapest earnings plays. There's no doubt LULU has the history of big jumps. The question is, will it repeat, and by how much. The worst case scenario is if earnings come out in-line with all the estimates and the stock goes nowhere. If that happens, all option prices (calls & puts) within that $5 - $10 radius will just evaporate within seconds and become worthless. As I say, earnings plays are always a crapshoot, but if you stick to stocks that have a history of jumping, you'll have better odds. That's all for now. Let us know if you decide to get into this unofficial play. I will send an update tomorrow on the results and follow-up action. You can contact us here. Regards, Lee Let's Grab That Cash!
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